On December 27, 2020 the COVID-related Tax Relief Act of 2020 (“COVIDTRA”) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“TCDTR”), both part of the Consolidated Appropriations Act, 2021 (“CAA”), were signed into law. These bills are part of a package that includes measures aimed at combating the COVID-19 health care and economic crisis. Among other things, the CAA modifies and expands certain programs and relief set forth in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
Below is a general summary of certain changes the CAA made with respect to the paycheck protection program (“PPP”) and economic injury disaster loans (“EIDLs”).
Paycheck Protection Program.
The CARES Act established the PPP, which provides up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients to maintain payroll during the coronavirus pandemic and to cover certain other expenses. The Paycheck Protection Program Flexibility Act (“PPPF”) made substantial changes to the PPP, including decreasing the percentage that loan proceeds must be used on payroll costs from 75% to 60%, thereby increasing the percentage that may be used for non-payroll costs such as rent, mortgage interest and utilities from 25% to 40%. Additionally, the PPPF permits borrowers to defer payments of principal, interest, and fees to 10 months after the last day of the covered period (the earlier of 24 weeks or December 31, 2020).
Under the CAA, eligibility to receive a PPP loan has been expanded beyond its original scope to include (among others) certain additional types of nonprofit organizations and cooperatives. Eligible entities which have not previously received a PPP loan have until March 31, 2021 to apply for a first draw PPP loan.
The CAA also permits certain smaller businesses which received a PPP loan and experienced a 25% reduction in gross receipts to take a second draw from the PPP of up to $2 million. Prior PPP borrowers must meet the following conditions to be eligible for the second draw loans: (i) employ no more than 300 employees (per physical location only in the case of certain businesses); (ii) have used or will use the full amount of their first PPP loan on or before the date the second draw; and (iii) demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.
Prior PPP borrowers may apply for a second draw PPP loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the 2019 calendar year. However, borrowers in the hospitality or food services industries (NAICS code 72) may receive loans of up to 3.5 times average monthly payroll costs. Like the first PPP loan, forgiveness of the second draw loan requires that the loan proceeds be used to pay certain eligible expenses and at least 60% of the PPP funds must be used for payroll expenses in order to receive full forgiveness. The CAA also expands the permissible uses of PPP funds for non-payroll costs to include worker protection costs related to COVID-19, uninsured property damages resulting from looting or vandalism that occurred during 2020 and specified costs relating to suppliers and operations.
The CAA provides that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This provision is effective as of the date of enactment of the CARES Act and provides for similar treatment for second draw PPP loans.
The CARES Act expanded access to EIDLs and established an emergency grant to allow an EIDL applicant to request a $10,000 advance on that loan. The CARES Act also provided loan repayment assistance for certain recipients of CARES Act loans. COVIDTRA clarifies that gross income does not include forgiveness of EIDL, emergency EIDL grants, and certain loan repayment assistance. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of these loans and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income. The provision is effective for tax years ending after March 27, 2020, which was the date of enactment of the CARES Act.
This client alert is for informational purposes and is not legal advice. The COVID-19 crisis has created a very fluid situation, in which changes to the law or related guidance can occur on a daily basis. Please contact your legal advisor for assistance before acting in relation to the subject of this client alert.